I earn Sh60,000 net. How do I build Sh3.5 million before end of this year?

My name is James. I am a father of two and currently, my wife is unemployed. My plans for this year is to build a home (estimated cost Sh3.5 million). I already have land. My net income is Sh60,000. My monthly budget is rent Sh10,000, food and grocery Sh20,000, Tithe Sh6,000, Sacco share contribution monthly Sh3,500 (current shares is Sh45,000), Chama Sh3,000 monthly, Bills (Tv, electricity, water) Sh4,000, Wife’s upkeep Sh5,000. Daughter’s school fees Sh13,000 per term. Side hustle is around Sh10,000 per month. I don’t have any debt. How do I achieve my home ownership goal?

Dominic Karanja, financial planning and investment consultant

You will need to restructure your budget. Your monthly expenses add up to Sh54,750 which is 78 percent of your total monthly income of Sh70,000 (net salary and side hustle income). Your monthly prorated school fees expense translates to Sh3,250. From the analysis of the expense categories, there is a likelihood that there are some expenses that you have missed (transport and personal care) and I assume these expenses are being taken care of by the surplus of Sh15,250. You will need to reduce your food and grocery expenses to save about Sh10,000 per month. Currently, you are saving about nine percent of your income through the SACCO and the Chama. You will need to increase the amount you are putting into savings and investment to a minimum of about 20 percent (Sh14,000 per month). You need to encourage your wife to have an income stream of her own to save the 7 percent being used for your wife’s upkeep. She can also assist in paying some bills. 

At the moment you cannot afford to raise the amount of Sh3.5 million to construct the house. Under the “one third (1/3) rule” the net amount an employee must retain after all deductions cannot be less than one-thirds of his salary. The amount you can afford to commit towards loan repayment is around Sh34,000. If you were to commit the entire Sh34,000 per month towards loan repayment you can qualify for a Sh1 million loan from a financial institution at a reducing balance rate of 15 percent per annum payable in three years. If you want to take a development loan from your SACCO right now you will probably qualify for Sh135,000 which is three times your current savings of Sh45,000. 

You will need to increase your SACCO savings so that you can qualify for a higher loan amount in future. Any extra funds should be directed towards savings and investment, and you should also have an emergency fund to cover your expenses for six months.

To achieve your dream of constructing the house you can use the incremental housing concept. You can start by constructing the core structure then keep on adding more rooms in phases as you accumulate more resources. Increase your SACCO contribution to Sh10,000, which qualifies you for a loan of Sh300,000 by the end of the year. 

The advantage of the incremental housing concept is that after you construct the core structure you can occupy the house and use the rent amount to make loan repayments.